Why do businesses spend money on doing good?

Nominees in the Corporate Responsibility and Environment category at the Financial Times ArcelorMittal Boldness in Business Awards 2013.
(Photo: Financial Times/flickr)

Corporate social responsibility (CSR) has become a big deal in the last decade or two. In fact, there are few major corporations out there that don't have some form of CSR or philanthropy programs. But why, in a capitalist market-driven global economy, would businesses spend money on anything other than making more money?

The answer to that question depends on who you ask. Some contend that it's simply a case of corporate "greenwashing," an attempt to misdirect or deflect accusations from critics and campaigners. Others contend that it's a case of enlightened self interest: Doing good is good business, because it attracts talent, wins publicity, differentiates you from the competition and can increase brand loyalty among consumers. Still others argue that it's just a case of "slack resources" — when companies are doing well, they have cash to spare that they can put toward good causes.

A new paper by Charles Kang, Frank Germann and Rajdeep Grewal in the Journal of Marketing aims to quantify such motivations and figure out the likely outcomes from different types of CSR motivation. Briefly, the researchers looked at four different drivers for CSR efforts:

Slack resources theory: The use of excess profits to do good on an opportunistic basis

CSR as good management practice: The use of CSR efforts to differentiate brands, attract talent and achieve brand loyalty

Penance theory: The idea that CSR efforts can be used to compensate for corporate misdeeds, for example funding environmental restoration initiatives after an oil spill

Insurance theory: The use of CSR initiatives to guard against future scandals, accidents or corporate malfeasance.

Among these motivation types, the research appears to show that most CSR efforts are geared toward improving financial performance, corresponding with the "good management practice theory." In fact, financial performance did improve when companies chose to incorporate CSR efforts into their management practices without the driver of other external pressure. The research also showed that "penance"-based CSR efforts were common, but in this case there was no evidence of these initiatives compensated for the financial damage done by the original wrongdoing.

As someone who operates an explicitly mission-driven business, I find these results validating but not at all surprising. Consumers, employees, investors and other stakeholders are human beings, after all. And human beings tend to be good at gauging authenticity and seeing through deception. It's also worth noting, that even CSR as good management practice is a somewhat reductive definition of motivation. I believe that many initiatives at all levels of business are not necessarily driven by an explicit self-interested desire to improve performance, but rather by a simple, human drive to do good and make a difference. It just so happens that when you do things for others, you feel better and perform better yourself.

When Google stepped in to help after the Japanese earthquake, for example, I doubt the first thing on their minds was how this could boost profits and make millions. It just so happens that this is exactly what happened.